While Banking's Watchdogs Dozed by the Fire

September 23, 1991

By Colin Barraclough

THE serpentine coiling of the Bank of Credit &amp; Commerce International's fraudulent worldwide operations has come as a shock to many in the United States. BCCI has caught in its sinister embrace such luminaries as Jimmy Carter and Clark Clifford, such pillars of the US banking system as First American Bankshares and National Bank of Georgia, and the Central Intelligence Agency.Yet BCCI is only the latest in a string of financial scandals. BCCI, the S&amp;Ls, Banca Nazionale del Lavoro (BNL) - each unfolding scandal was met by calls for stricter banking legislation. But choking banks with red tape won't protect depositors. We need no more laws; rather, we need better enforcement of those already on the books. In August 1990, for example, Florida state regulators indicted BCCI and eight of its officers on charges of money laundering after a four-year investigation. Nonetheless, despite that investigation, BCCI was able to use Clifford and other front-men to illegally purchase three leading US banks in other states. It took another year, and the swindling of some $30 million more from US depositors, before the Federal Reserve Board and the Manhattan district attorney pressed charges against BCCI. The Federal Reserve should have discovered earlier just who was backing Clifford and friends. Had it enforced the existing US laws, BCCI could not have seized control of the banks in Washington, D.C., California, and Georgia. It was the overseers' failure to act, not the failure of the legislation itself, that let BCCI defraud depositors. In another case involving the BNL in Atlanta, proper enforcement of existing legis- lation could have avoided the loss of $1.9 billion to the US government. Between 1986 and 1990, BNL loaned some $4 billion to Iraq. Although channeled through a US Department of Agriculture export program run by the Commodity Credit Corporation (CCC), most of the transfer was fraudulent. BNL declared only a tiny fraction to the regulatory authorities, borrowed secretly on the international markets to raise the cash, and c oncealed transaction records on hidden computer disks. Iraq funneled much of the money into the Ministry of Industry and Military Production in Baghdad, which funded Saddam Hussein's chemical, nuclear, and ballistic weapon research. When Iraq invaded Kuwait, it defaulted on its repayments, leaving the US government liable for the billion-dollar balance. Some claim that the BNL case proves that present banking legislation is too weak. They want an uncompromising limit on international banking regulations in the US and greater intervention by regulatory authorities in banking transactions. Yet laws already on the books, enforced by three government agencies, could have prevented BNL's illicit deals. The state of Georgia audited BNL's books each year and continued to license its operations until 1990. Yet it failed to notice many irregularities. Even a quick glance at BNL-Atlanta's assets showed that the bank's assets jumped from $785.6 million in 1989, to by far the largest foreign-owned presence in Georgia in 1990, with assets of $2.3 billion. The Federal Deposit Insurance Corporation (FDIC) verified the state's figures. In 1989, however, the FDIC spent only a few hours checking the state's auditing of BNL-Atlanta. Had they dug a little deeper, or been aware of rumors on Wall Street, they would surely have discovered BNL's illegal loans. And t he federally-administered CCC, designed to boost the export of American grain to countries with serious credit problems, had by 1988 sent $5 billion to Iraq, most through this small bank in western Georgia with a total staff of just over 10. Shouldn't it too have raised the alarm? All of this is not to say that some legislative revision wouldn't help. Updating the 1978 International Banking Act by empowering it to scrutinize publicly-owned or foreign-owned banks would widen federal control of international banking operations in this country. And the proposed banking reform bill presently in the House, designed to increase banks' deposit bases in the US, might aid depositors after a future bank collapse. Alas, such legislation would not have stymied BCCI's takeover of First American, nor would it have collared BNL before the US government was left with a bill for $1.9 billion. The real answer to banking fraud is not more regulators, just more vigilant ones.

Colin Barraclough is a freelance writer who lives in New York.

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